We entered into a long position in General Growth Properties (GGP) in 2009 when it was trading at ~$2/share and it was facing a technical bankruptcy due to its overleveraged position. Since then, the company was able to exchange $7B of its debt for fresh equity capital. While this diluted shareholders by over two-thirds due to the number of shares issued in the bankruptcy reorganization, at least it didn’t wipe out the shareholders. We were also pleased to see that the reorganization reduced annual interest expense from $1.4B in 2010 to $958M in 2011 and we were also pleased to see the company spin-off its master planned communities business as The Howard Hughes Corporation (HHC). We also thought that it was a good idea for the company to spin off 30 of its lower performance, second-tier Class B malls to Rouse Properties Inc. (RSE) as it served to prune the company’s mall portfolio of weaker performers as well as rid itself of $1B of mortgages and other debts. Despite the fact that Brookfield Asset Management (BAM) and General Growth Properties have rejected calls from Bill Ackman of Pershing Square Capital to sell itself to Simon Properties Group (SPG), we believe that there is value in GGP and we are looking at reentering a “speculative long position” in GGP.

Despite the fact that we had steadily liquidated our position last year in GGP, we had kept a fairly close watch on the company’s performance, as well as its former subsidiary Rouse Properties. Based on the pathetic performance of Rouse in its first six months as an independent company, we can see why its shares declined by nearly 20% when it was in when-issued trading. Even though Brookfield agreed to backstop a $200M shareholder rights offering for the company in Q1 2012, we were perplexed as to why Rouse’s share price increased by 28.5% since its January 12th separation from GGP.